Water quality trading markets could offer new income stream

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Farmers who exceed local standards for runoff could get a financial benefit with water quality trading. USDA and EPA are teaming up to develop systems to determine the value of farm water-cleaning actions. Pilot projects are underway in Wisconsin, Ohio, Oklahoma, Florida, Virginia, Maryland and Pennsylvania.

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An upstream small dam, terraces, buffer strips, grass plantings and other conservation measures are part of a project designed to improve the quality of water entering Union Grove Lake in Tama County, Iowa.

Financial framework

In this cost-share program, farmers would pay just 25% of the cost of implementing and maintaining BMPs (such as cover crops). EPRI pays the remaining 75%, explains Jessica Fox, program manager, EPRI-Environment.

The price of credits fluctuates, depending on the location of the watershed, the distance between the farming operation and the buyer of the credits. The price of credits in the EPRI program would be based on per pound of nitrogen and the cost of the BMPs involved. This would differ on each farmer’s soil, slope of the fields and conservation practice. EPRI conducts analyses based on the particular watershed involved to determine the value. For more information, visit wqt.epri.com.

The Ohio River project has a number of BMPs already in place and will execute a series of stewardship credit pilot trades between 2014 and 2015 to test an online credit registry and live trading market. The first credit trades will take place early this year.

“As markets are built, we need agri-cultural stakeholders at the table,” says USDA’s Mills. She adds that for these markets to succeed, the credits must provide enough financial incentive to farmers to make it worthwhile. Calcu-lating the necessary BMPs and signing up for trading programs should not be onerous. Also, farmers’ privacy must be considered when developing the verification standards, Mills adds.

The water quality trading markets are designed with working lands in mind. “USDA is interested in ensuring credits can be generated by working farms and ranches, not just land retirement,” Mills says. Farmers may even be able to “stack” credits if their BMPs also generate wildlife habitat, carbon sequestration, bio-diversity and other ecosystem services.

The credits must be quantifiable and verifiable, Mills says. The monitoring and approval of these credits will be required, and rules will be set by the state in which the trading occurs, not by EPA and USDA, Gilinsky notes. The length of credit approval can be annual or longer, depending on what the state in which the trading takes place decides. Auditing will most likely be done by conservation districts or third-party contractors.

The federal agencies will provide grants, loans and technical assistance to states, agricultural producers, regulated sources and interested third parties on water quality trading. They also will develop tools and information resources that states and credit generators can use in decision-making. These resources will be used to foster consistency and integrity across regional initiatives.

“This is a 21st-century approach that can create new revenue streams for producers, helping keep farmers as farmers at a time when they are losing acres to development,” Mills says. “It also provides a new set of incentives to make investments in conservation. This is an exciting time for agriculture and ecosystem services.”

Gilinsky adds that the new agreement between USDA and EPA also provides for more education and outreach on trading and how agricultural producers can participate.